A country with an overvalued currency

Question

Quizplus · Accepted Answer

An overvalued currency means that its value is higher than what it should actually be in the market. This makes the country's exports expensive, reducing demand for them, while imports become cheaper, increasing their demand. Consequently, the country will have a balance of payments deficit as its export earnings decrease, and import payments increase. To maintain the overvalued currency, the country's central bank would need to buy its own currency in the foreign exchange market, ultimately leading to losses of foreign reserves. Therefore, all of the options mentioned in the question are correct.

A Country with an Overvalued Currency